Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors—home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors—home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:


*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, considers last year’s net operating income of $39,000 to be unsatisfactory; therefore, she is considering the possibility of discontinuing the housekeeping program.

The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided.

Required:

1-a. What is the financial advantage (disadvantage) of discontinuing the Housekeeping program?

1-b. Should the Housekeeping program be discontinued?

2-a. Prepare a properly formatted segmented income statement.

2-b. Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services?

Explanation

1.

The financial (disadvantage) of discontinuing the Housekeeping program is calculated as follows:

Contribution margin lost if the Housekeeping program is dropped			$	(100,000	)
Fixed costs that can be avoided:
Liability insurance	$	15,700
Program administrator’s salary		36,700		52,400
Financial (disadvantage) of discontinuing the Housekeeping program			$	(47,600	)

Depreciation on the van is a sunk cost and the van has no salvage value since it would be donated to another organization. The general administrative overhead is allocated and none of it would be avoided if the program were dropped; thus it is not relevant to the decision.

The same result can be obtained with the alternative analysis below:

		Current Total		Total If House-keeping Is Dropped	Difference: Net Operating Income Increase or (Decrease)
Revenues	$	926,000	$	671,000	$	(255,000)
Variable expenses		472,000		317,000		155,000
Contribution margin		454,000		354,000		(100,000)
Fixed expenses:
Depreciation*		70,500		70,500		0
Liability insurance		43,200		27,500		15,700
Program administrators’ salaries		116,100		79,400		36,700
General administrative overhead		185,200		185,200		0
Total fixed expenses		415,000		362,600		52,400
Net operating income (loss)	$	39,000	$	(8,600)	$	(47,600)

*Includes pro-rated loss on disposal of the van if it is donated to a charity.

2.

To give the administrator of the entire organization a clearer picture of the financial viability of each of the organization’s programs, the general administrative overhead should not be allocated. It is a common cost that should be deducted from the total program segment margin.

Thanks